The Secret Investor Ponders His Innovative Finance ISA Strategy

Last post: Feb 24, 2016

It was with some disappointment that the Secret Investor discovered that the HMRC were not going to allow existing funds that had been invested in P2P Lending to be transferred into Innovative Finance ISAs (IFISAs).

It was with some disappointment that the Secret Investor discovered
that the HMRC were not going to allow existing funds that had been invested in
P2P Lending to be transferred into Innovative Finance ISAs (IFISAs).

Over the past couple of years I had built up enough capital
in my Funding Circle account to fill an annual ISA Allowance. This has been
spread in small amounts across more than 400 companies – diversity being the
key to successful P2P investing. I was really looking forward to the tax burden
on this capital being released by the introduction of the IFISA on 6th
April.

It was therefore something of a shock when, a few weeks ago,
Funding Circle announced that their investors will have to set up a separate
IFISA account and would be unable to transfer their existing holdings into it
without first turning them into cash by selling their loans on the Secondary
Market.

Although they explained that this was due to the rules that
HMRC had set, with Funding Circle getting income from every sale on the
Secondary Market the thought crossed my mind that it was some sort of money
making scam on their part but since then other platforms have announced that
the government is forcing them to implement the same policy.

My initial plan on accepting the inevitability of this
situation was to sell all my Funding Circle investments during March – or at
least as many as I could without incurring a loss – and move the cash over to
the IFISA account on 6th April. However, I then considered how long
it would take to redeploy such a large lump sum in the £80 chunks which is my
self-imposed exposure limit per borrower.

Not only would it take too long to research and consider so
many loans (even with the limited amount of information that Funding Circle
provide) but, despite the recent up-turn in volumes, there are just not enough
investments listed on their site to enable the funds to be redistributed in a
reasonable time-frame and those that offer a good rate of return are usually
fully filled in no time. I would be doing well to re-allocate the entire
allowance within 12 months.

With the prospect of a large proportion of my capital
sitting in the IFISA account not earning anything for much of the year, the
amount of profit returned seemed likely to be little more than what the funds
in the existing account would earn over the same period after tax. Heavy use of
the Secondary Market could allow the funds to be allocated more quickly but the
charges for doing to so would be high.

If I moved the sum to an Assetz Capital IFISA then the
unallocated funds would be earning 3.75% pa via their default Quick Access
Account but, due to the site's deal makers undertaking a more cautious approach,
the rates of return are lower on that platform than Funding Circle – assuming
not too many duff investments are picked up on the latter!

It all seems to be swings and roundabouts. Although my plans
are not set in stone, I don't think a "Big Bang" tactic is the best approach. I
expect to leave the existing Funding Circle funds where they are and put my
monthly P2P deposit into one of their IFISAs. I will switch off Auto Bid for
the standard account and transfer over the cash as the repayments build up
until the full allowance is reached in the IFISA.

One further problem is that investors are only allowed to
have one IFISA per tax year. This is certainly not an investor friendly HMRC
ruling as diversification is a key mantra for P2P Lending. With this all-eggs-in-one-basket
approach being imposed, the safest approach is probably to invest via the
largest provider which, despite all its faults, is Funding Circle with the
expectation that it is the least likely to fold. It would be a disaster akin to
the Titanic if it did!

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